Decade-long battle between two banks ends

People’s Bank instituted action against Habib Bank in the Commercial High Court Colombo in 2007 over an issue which revolves around the cheque clearing process followed at the time and the legal battle fought for a decade finally came to an end with judgment being delivered in favour of the Defendant, Habib Bank.

A customer (drawer) of People’s Bank drew six cheques in favour of a customer of Habib Bank, however the drawer later countermanded the six cheques, as a result of which People’s Bank sought to dishonour the cheques. As the paying bank, People’s Bank is entitled to dishonour the cheques, however the paying bank must follow the proper procedure in informing the collecting bank i.e. in this instance Habib Bank that the cheques are to be dishonoured. 

The issue in this case arose as the Collecting Bank (Habib Bank) had honoured payment on the six cheques whereas People’s Bank took up the position that the cheques were honoured by Habib Bank contrary to the instructions given by People’s Bank to dishonour the cheques. The issue before Court was whether People’s Bank had duly dishonoured the cheques and if Habib Bank has acted contrary to banking practice.

In 2002 the Central Bank of Sri Lanka (CBSL) took a policy decision to divest the activities of the Sri Lanka Automated Clearing House (SLACH) and together with all licensed commercial banks operating in Sri Lanka, CBSL launched LankaClear Ltd., which is the national cheque clearing house owned by the Central Bank of Sri Lanka (CBSL) and all licensed commercial banks operating in Sri Lanka.

The cheque clearing procedure at that time required all banks to give notice of dishonour to the collecting banks on or before 12 noon on the day following the day on which cheques are presented by paying banks to collecting banks at the Clearing House. 

The procedure also allowed paying banks to seek an extension of one additional day in the event they were unable to give the notice of dishonour during the stipulated time period. 

Hence, all payment and settlement of cheques took place through Lanka Clear at the time material to this case (i.e. November 2005) and cheques were required to be presented physically by the collecting banks to the paying banks through the respective representatives at Lanka Clear strictly adhering to the timelines provided for cheque clearing. Any dishonoured cheques were therefore required to be returned by the paying bank to the collecting bank through Lanka Clear.

The Judge of the Commercial High Court Mahinda Samaywardhena HC J held that People’s Bank failed to prove that Habib Bank acted wrongfully, unlawfully or contrary to banking practice by refusing to accept the six dishonoured cheques outside the timeframe provided for cheque returns and by crediting the value of the said cheques to the account of its client.

 Court further held that banks must follow proper procedure when it comes to dishonouring of cheques and must take place through the proper channel, i.e. Lanka Clear.

Court also held that any verbal communications of dishonoured cheques from one bank to another would not suffice, if banks fail to follow the procedure that was in place. 

Avindra Rodrigo with Rozali Fernando instructed by F J & G de Saram appeared for Habib Bank while Kushan de Alwis P.C. with Hiran Jayasuriya appeared for the Plaintiff.